Posted 11-10-2008 5:15 pm by
When it comes to buying a business, there are many mistakes that anxious future business owners make. Although purchasing an established business can be a profitable venture, it can also put you on the fast track to bankruptcy if you make any of these common mistakes.
When it comes to buying a business, there are many mistakes that anxious future business owners make. Although purchasing an established business can be a profitable venture, it can also put you on the fast track to bankruptcy if you make any of these common mistakes.
Mistake #1: Failing to Consider the Return on Investment
When purchasing a business, be sure to consider the likely return on investment, or ROI. If you are going to invest in a business that will provide only a 5% ROI, for example, simply putting your money into stocks and commodities would be a better investment option. Before making a purchase, make certain the business offers a greater ROI than what you could get through your stock portfolio.
Mistake #2: Shorting Out on Cash
When planning on a business purchase, make certain you still have money left over after making your down payment on the purchase. This way, you still have cash available to make any additional investments into the business. Setting aside 10% of the money you have available is a good rule of thumb to follow, though it is also a good idea to also set aside enough working capital to cover your business expenses for three months as well.
Mistake #3: Purchasing All Receivables
Although it is usually a good idea to purchase the receivables when buying a business, you should avoid purchasing those that are older than 90 days. Purchasing receivables that are this old can be risky because they are often difficult to collect. Even for those that are less than 90 days old, you should protect yourself by having the seller warrant the receivables. That way, if you cannot collect upon them, the cost of the receivables can be charged back against the purchase price.
Mistake #4: Failing to Verify Information
When purchasing a business, don't assume the seller is providing you with information that is completely accurate. Rather, take the information and get it verified by a professional, such as a CPA who will be able to audit the financial statements for you. Also, make certain you are clear on what assets are included in the transaction and which ones are not. While it is important for you to keep yourself protected, you should also be certain to treat the seller fairly as well. If you are cold and hard-headed during the buying process, the seller likely won't want to complete the sale. Rather, be willing to negotiate throughout the process in order to develop a deal that works for both of you.
Mistake #5: Agreeing to Unreasonable Payments
Many business buyers overestimate how much revenue they will earn from the business they purchase. As a result, they agree to a payment schedule that they really cannot afford. Therefore, it is a good idea to set up a payment schedule that starts off with smaller payment amounts. That way, you will be more likely to be able to make the regular payments without putting too much of a financial strain on yourself and your business.
AARON MULLER| ADVANTAGE COMMERCIAL BROKERS
BUSINESS BROKER, COMMERCIAL PROPERTY SPECIALIST
DIRECT: 425.766.3940
FAX: 425.882.2547
CHECK OUT MY LISTINGS AT www.acbrokersinc.com
